This note was originally published
at 8am on April 28, 2011.
INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK
(published by 8am every trading day)
and PORTFOLIO IDEAS in real-time.
“It’s not clear that we can get substantial improvements in payrolls without some additional inflation risk.”
-Ben Bernanke, April 27, 2011
We’re all for transparency in what it is that we do. The problem with Ben Bernanke’s definition of transparency is that it’s not clear that he knows what he is doing. His forecasts are routinely late and/or wrong, and his decision making process depends heavily on those forecasts.
Our Q2 Macro Theme that The Bernank will remain “Indefinitely Dovish” is a forecast. So is our call that the probability of a US Currency Crash continues to heighten. Ben Bernanke did nothing but confirm those forecasts yesterday:
- He raised his inflation forecasts
- He cut his US GDP growth forecasts
- He Burned The Buck
While many critical factors are “not clear” to the Central Planner-in-Chief of globally interconnected markets, the prices that are marked-to-market real-time remain Crystal Clear.
Of the Big 3 that I made a call on in yesterday’s Early Look, I had 1 out of 3 wrong:
- Long Gold – hitting an all-time high intraday yesterday and again this morning (all-time is a long time), the price of Gold is now in line with the SP500’s YTD return of +7.8% YTD.
- Long Oil – rallying immediately as the US Dollar crashed to fresh YTD lows yesterday, the price of West Texas Crude Oil is now up +23.7% for 2011 YTD, outperforming both the SP500 and Gold by a factor of 3:1.
- Short SP500 – rallying on low-volume to a fresh YTD high of 1355, the SP500 is up 50 points (+3.8%) in a almost a straight line in the last 7 trading days into a government presser. I think The Bernank calls this “price stability.” We call it the market Gaming Policy.
While my biggest position remains long International Currencies (we have a 30% Global Macro allocation in the Hedgeye Asset Allocation Model to FX), what a lot of people want to talk to me about isn’t the raging bull market in currencies other than our own – it’s usually “what gets you to cover and buy the SP500.”
I get why that is. I think it’s fair. I am accountable to all of the current 26 positions in the Hedgeye Portfolio, particularly those that I have wrong. As Seth Klarman appropriately said earlier this year, “focusing on what you can lose versus what you can earn sets you apart.”
So, other than our “free” market’s ability to function without the heavy hand of a Central Planner holding pressers, where am I losing? Here are the updated returns in the Hedgeye Portfolio of the Big 3 aforementioned positions:
- Gold = +8.37%
- Oil = +5.37%
- SP500 = -2.46%
Just like that old nursery rhyme on Romper Room – one of these things is not like the others; one of these things just doesn’t belong… being short the SP500 right here and now is obviously wrong. The score doesn’t lie; people do.
Back to the Dollar…
While The Bernank’s comments addressing a Crashing US Currency were “not clear” yesterday, the world currency market’s vote was Crystal Clear:
- On The Day – the US Dollar lost another -0.5% (that used to be a lot for a day in the world’s reserve currency) to make a fresh YTD low.
- On The Week – the US Dollar is down another -1.3% (down for the 14th week out of the last 18 and down -9.8% since January).
- On The 28 Months – since Obama and Groupthink Geithner took their seats, the USD is down -17% (300bps away from crashing).
Now please don’t call me a Republican for putting Obama’s name beside the score. I was at least as bearish on Bush and his US Dollar Devaluation policy to inflate as I am on this administration’s grasp of Global Macro markets and how they are interconnected.
Yes, correlated – which, suspiciously, was a word that The Bernank didn’t use once in his prepared FOMC statement or presser yesterday.
How the world’s Central Planner-in-Chief can use the word “hope” multiple times and not address the most obvious risk that a US Currency Crash imposes on global markets is beyond me. The Audacity of Hope is clearly not a risk management process, so here’s the correlation math:
- USD to Oil = -0.92
- USD to Gold = -0.92
- USD to CRB Index = -0.87
*Note to Timmy and The Bernank: these are what we call the inverse correlations of the US Dollar to Oil, Gold, and the 19 Commodity Component CRB Index on what we call our intermediate-term TREND duration (3 months). These are at all-time highs.
The alternative risk management strategy to dismissing either causality and/or correlation risk (the global median inflation rate has been making higher-highs for the last 40 years, effectively since Nixon abandoned the Gold Standard in favor of the Fiat Fool Policy Standard), is to simply believe. Yes, we can all go there – I took my family to see Shamu’s “Believe” in Orlando last week – it was magical.
According to Big Broker yesterday (The Banker of America Merrill Lyncher North American Economics Strategist – Ethan Harris) what the Almighty Cental Planner of US Dollar Destruction was doing with this presser thing yesterday was, “teaching the American public about how monetary policy works…” (Bloomberg article by Craig Torres and Josh Zumbrun)
Thanks for the transparency. Thanks for the teachings. I may as well gloss over all of world history’s lessons on Currency Crashes now and go back to buying-the-damn-dips in US stocks alongside a stuffed dolphin at Seaworld.
My immediate-term support and resistance lines for Gold are now 1499 and 1534 (Gold is immediate-term overbought). My immediate-term support and resistance lines for Oil are now $110.59 and $114.68 (buy more). My immediate-term support and resistance lines for the SP500 are now 1328 and 1360 (I’ll stay short, for now).
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer